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Friday, June 15, 2012

Financial services giant HDFC hit out at global brokerage firm Macquarie, saying the latter did not attempt to "verify the facts and statements" before raising concerns over its stock performance and accounting practices.

In a report published today, Macquarie Equities Research said that "a structural de-rating (of HDFC stock) is likely because the quality of earnings and ROE (Return on Equity) reported is being driven more by its corporate book and aggressive accounting practices."

Alleging that accounting practices were being used to inflate earnings and ROE, Macquarie said: "Over the past two years, HDFC has been adopting aggressive accounting practices by passing provisioning through reserves and also making the adjustments for zero-coupon bonds (ZCBs) through reserves."

It further said that HDFC's FY11 and FY12 earnings were overstated by 38 per cent and 24 per cent, respectively, and the ROE would have been lower for these years if adjustments had been made through the profit and loss account.

"In other words, earnings growth has been managed, in our view," Macquarie said.

Reacting strongly to the report, HDFC said in a statement that its "management completely disagrees with the contents of the Macquarie report dated June 14, 2012 as the concerned analyst has not attempted to meet anyone from HDFC before making the aforesaid report and verify the facts and statements made therein."

"Moreover it is surprising that Macquarie in its report as recently as May 7, 2012 had put a price target of Rs 775 on HDFCs stock with an outperform rating based on the same facts and figures. We are therefore unable to understand as to what prompted the analyst to change his recommendation and outlook within a months time," the company said.

HDFC also dismissed any problems in its accounting, saying, "it needs to be understood that HDFC is both a housing finance company and is also a Financial Holding Company.

When asked whether they suspect some rivals or market forces behind the issues raised in the report, the HDFC officials declined to comment.

However, market sources said that rivals and market operators at times tend to take benefit of negative research reports to buy shares at lower levels.

Market regulator Sebi is already investigating certain other cases where research reports have been used by market operators to push up or pull down the share prices.

HDFC also said that it is surprising that Macquarie has changed its stance within a month, when no material changes have taken place.

In today's report, Macquarie has downgraded HDFC stock from "outperform" to "underperform", while lowering the one-year price target to Rs 550.

HDFC's shares today closed at Rs 644.60, down 1.63 per cent, at the BSE.

In its statement, HDFC further said: "Under the Indian GAAP, the accounts of HDFC are presented on a standalone basis wherein only the dividends received from subsidiaries and associates are included as part of the income and its true share of profit in its subsidiaries and associates is not considered as part of HDFC's profits."

The company said that it has invested in subsidiaries and associates out of the amounts borrowed by way of Zero Coupon Debentures and therefore the interest cost on such borrowings amounting to Rs 485 crore during 2011-12 has been charged to Securities Premium account, as per the Companies Act.

"For the year ended March 31, 2012, if the proportionate share of profits of HDFC in its subsidiaries and associates is considered, the profits of HDFC will be higher by Rs 1,340 crore after reducing the dividends received from the subsidiaries and associates," it said.

"Under these circumstances if the aforesaid interest cost on Zero Coupon Debentures are charged to profit and loss account, HDFC's profits would still be higher by Rs 855 crore.

"Further as and when IFRS is made applicable under Indian GAAP, the overall profits will go up further as some of the expenses on borrowings and loan sourcing will require to be amortised instead of currently being fully charged to the Profit and Loss account in the year of payment," HDFC said.

In a point-by-point rebuttal to the issues raised in Macquarie report, HDFC further said that the one time provisioning requirements in respect of standard assets is not reflected in profit and loss account as it relates to all the past assets and is transitory in nature.

"The interest rates on retail home loans are lower on account of lower risk weights, lower NPAs and also diversified risk profile," it added.